Bond Report: 10-year Treasury yield pushes above 1.6%, highest level since November, to kick off 2022
Treasury yields kicked off the new year with a rise on Monday, with the 10-year rate touching the highest level in more than a month, as investors turned more optimistic that the latest surge of COVID-19 cases won’t inflict much damage on the global economy.
What are yields doing?
The yield on the 10-year Treasury note TMUBMUSD10Y, 1.635% was at 1.592% after briefly breaking above 1.6%, up from 1.496% at 3 p.m. Eastern on Friday. Yields and debt prices move opposite of each other.
The 2-year Treasury note yield TMUBMUSD02Y, 0.777% was 0.794%, compared with 0.73% on Friday afternoon.
The 30-year Treasury bond yielded TMUBMUSD30Y, 2.029% 1.966%, up from 1.888% on Friday.
For all of 2021, the 10-year yield saw its largest annual rise since 2013, according to Dow Jones Market Data, while the 30-year yield posted the biggest rise since 2018 and the 2-year’s rise was the largest since 2017.
What’s driving the market?
Investors sold off Treasurys in early Monday trading on improved confidence that the latest wave of coronavirus cases, driven by the omicron variant, may be less harmful to the global economy than first feared.
While the rise in COVID-19-related hospitalizations is accelerating, with the daily average in the U.S. climbing above the 80,000 mark to a three-month high, studies show the omicron variant to be less severe than other variants and as more people get vaccinated.
Over the past week, the average number of new U.S. cases has topped 400,000 for the first time, up more than 200% over the last 14 days, according to a New York Times tracker. Deaths have fallen by 3% over the same period.
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Dr. Anthony Fauci, the government’s top infectious disease doctor, said Sunday that the focus should be on the number of hospitalizations, which could overwhelm health systems, rather than new infections. Many infections are mild or asymptomatic and scientists believe the omicron variant, while more infectious, may be less virulent than other variants. But other variants are also circulating.
Moreover, the risk of severe disease from any circulating variant, including omicron, is much, much higher for the unvaccinated, Fauci warned last week.
Data released on Monday included the final Markit manufacturing purchasing managers index reading for December, which was revised down to 57.7 from a 57.8 initial estimate. Meanwhile, construction spending was up 0.4% in November after a revised 0.4% rise in the prior month. December jobs figures will be this week’s data highlight, with official data due on Friday.
For all of 2021, yields posted some of their biggest annual gains in years as investors assessed a surge in inflation, fueled by strong consumer demand and exacerbated by supply-chain shortages, that proved stronger and more persistent than central bank policy makers had anticipated.
Meanwhile, the yield curve, a line tracking the differential in yields across Treasury maturities, flattened significantly in 2021. The spread between 10-year and 2-year Treasury yields had widened to more than 160 basis points in March of last year, before narrowing to less than 79 basis points by the end of the year, according to FactSet. A flattening curve can be a sign that investors fear that central bankers could move too aggressively, undercutting the economy.
What are analysts saying?
“The 10s-2s spread ended 2021 at 78 basis points. As we start 2022, the 10s-2s spread is more important than the absolute level of the 10-year yield, because that will continue to be our ‘real-time’ indicator of whether the markets think the Fed is removing stimulus too quickly,” said Tom Essaye, founder of Sevens Report Research, in a Monday note.
A break below the spread’s recent low at 73 basis points “would be a negative technical signal and we’d expect further declines in 10s-2s which could pressure stocks,” Essaye wrote. “Instead, we want to see the 10s-2s spread move back towards 1% and signal that while the Fed is removing accommodation, the market isn’t concerned about it killing the recovery.”